How the Tigon books were cooked – expert

On the first day of his testimony in the criminal trial of Tigon kingpins Gary Porritt and Sue Bennett, forensic expert professor Harvey Wainer testified how accounting rules were flouted as far back as 1997.

This resulted in profits of the JSE listed financial services group being overstated by 117% in that financial year and by 93% at the interim stage in July 1997, he showed.

Wainer then pointed to similarities between this scheme and the Progressive Systems College Guaranteed Growth (PSCGG) investment scheme that saw investors losing R115 million a few years later.

The state’s first witness Jack Milne earlier testified that he, Porritt and Bennett from the outset conspired to mislead investors in PSCGG. They are denying that.

Milne has served a term in jail for his role in the events, after reaching a plea and sentence agreement with the state.

Porritt and Bennett are charged with fraud, racketeering and contravention of the Companies Act, the Income Tax Act and the Exchange Control Act. The charges relate to the collapse of Tigon around 2002.

Porritt has been incarcerated since June 2017 when his bail was withdrawn due to his failure to attend court. Both accused are conducting their own defence.

Wainer’s testimony was based on a report he compiled in 2005 on accounting and financial matters relating to Tigon. To do this he studied documents provided to him by the prosecuting authority covering the period 1996 to 2002.

He referred to three identical “client investment account agreements” concluded on October 14, 1996, between Pan Pacific Financial Services, which was a wholly owned subsidiary of Tigon, and entities by the names of Goldstar, Three Oceans Finance & Trading, and Calabi.

In terms of the agreements Pan Pacific would manage investment funds provided by the three entities. The aim was to achieve a return over a period of a year of 10% more than the increase in the JSE Industrial Index over the same period.

‘Performance fee’

Pan Pacific guaranteed this return, and would earn a “performance fee” consisting of all the returns exceeding that.

The three companies allegedly invested the dollar equivalent of R12.7 million, R7.6 million and R9.5 million respectively, which Pan allegedly invested in Tigon shares purchased at R8.50 each.

‘Management fee’

Another wholly owned Tigon subsidiary, Asia Pacific Sourcing, allegedly entered into an agreement with Pan Pacific in terms of which it was entitled to 95% of Pan Pacific’s profits as a “management fee” for providing investment advice to Pan Pacific.

For the financial year ended January 31, 1997, Tigon’s profits incorporated those of Asia Pacific, including an amount of R24.9 million, being Asia Pacific’s 95% share of the “performance fee” of Pan Pacific in relation to the three agreements.

Tigon however made an unspecified provision for R7 million, which effectively reduced the profit contribution from Asia Pacific to R17.9 million. This provision was released in the interim statements six months later.

Performance fee reimagined

Wainer pointed out that the JSE Industrial Index declined in the relevant period. Pan Pacific therefore claimed the total increase in the Tigon share value as its “performance fee”. The share had increased from the purchase price of R8.50 to R16.00 per share.

Wainer referred to various provisions of the Companies Act and Generally Accepted Accounting Practice that set out the rules for financial reporting at the time.

He pointed out that contributions from equity participants were excluded from the definition of revenue and that revenue for the provision of a service could only be recognised once the outcome of the transaction could be estimated reliably.

12-month return could not be determined after 10 months

According to Wainer the aim of the agreements between Pan Pacific and the three companies was to achieve the stated return over 12 months. That would only be in October 1997. The actual return could therefore not be determined by January 1997.

The recording of the “performance fee” as Pan Pacific revenue in January 1997 therefore did not comply with the relevant accounting standards. This equally applies to the treatment of the funds in the Asia Pacific books, Wainer testified.

He stated that it was improper to include the R17.9 million in the Tigon group’s profits for the year ended January 1997 and resulted in materially overstated profits and a materially inflated balance sheet.

Agreements ‘clearly circular’

There was however an even more fundamental issue with the recognition of the “performance fee” and “management fee”, Wainer stated.

The agreements are “clearly circular”, he found.

“Tigon’s group profits are driven by Tigon’s share price [Asia Pacific’s fee being 95% of Pan Pacific’s fee, which was dependent upon growth in the Tigon share price]. Tigon’s share price would, in the ordinary course, be driven by growth in Tigon’s group profit.”

He said for accounting purposes and in financial reality the amount received by Tigon from Pan Pacific via Asia Pacific was not revenue. It was dependent on changes in the Tigon share price relating to contributions from equity participants, namely Goldstar, Three Oceans and Calabi – and should have been accounted for as equity.

In his testimony, Weiner listed the similarities between this scheme and PSCGG:
· The objective was to outperform the whole market, although using different benchmarks;
· The discretion and control were similar;
· In both cases the performance was guaranteed;
· Tigon in both cases made profit from investments in Tigon shares that were in fact equity contributions.

Wainer will continue testifying on Tuesday.